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Where do credit scores come from ?

If you are going to better your credit score, then logic has it that you must know what your credit score is and how it works. Without these details, you won’t be able to very adequately amend your score because you won’t comprehend how the things you do in daily life influence your score.

If you don’t understand how your credit score works, you will also be at the mercy of any firm that tries to tell you how you can improve your score - on their conditions and at their price.

In general, your credit score is a number that lets lenders know how much of a credit liability you are. The credit score is a number, commonly between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.

In general, the greater your credit score, the better credit risk you make and the more probable you are to be given credit at excellent rates. Scores in the low 600s and below will often give you problems in finding credit, while scores of 720 and above will normally give you the best interest rates out there. Nevertheless, credit scores are a lot similar to GPAs or SAT scores from college days - while they give others a quick image of how you are doing, they are explained by people in different ways. Some lenders put greater significance on credit scores than others.

Some lenders will work with you if you have credit scores in the 600s, while others give their best rates only to those creditors with very high scores indeed. Some lenders will look at your complete credit report while others will accept or reject your loan application based purely on your credit score.

The credit score is derived on your credit report, which consists of a history of your past debts and repayments. Credit agencies use computers and mathematical calculations to arrive at a credit score from the information enclosed in your credit report.

Each credit agency uses separate solutions to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system. FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation company. This is by far the most used software since the Fair Isaac Corporation made the credit score model used by many in the financial industry and is still acknowledged, one of the leaders in the field. In fact, credit scores are frequently called FICO scores or FICO ratings, although it is important to realize that your score may be tabulated using other software.

One other thing you may want to understand about the software and mathematics that goes into your credit score is the fact that the maths used by the software is based on research and approximate mathematics. This is an important and easy concept that can help you understand how to improve your credit score. In understandable terms, what this means is that your credit score is in a way calculated on the same principles as your insurance premiums.

Your insurance company likely asks you questions about your health, your lifestyle habits (such as whether you are a smoker) because these bits of information can let the insurance company know, how much of a risk you are and how likely you are to make substantial claims, later on. This is based on research.

Studies have demonstrated, for example, that smokers tend to be more susceptible to serious illnesses and so need more medical attention. If you are a smoker, you may face higher insurance premiums because of this. Likewise, credit bureaus and lenders often look at general patterns. Since people with too many debts tend not to have good rates of repayment, your credit score may suffer if you have too many debts, for example. Understanding this can help you in two ways:

1) It will let you see that your credit score is not a personal reflection of how “good” or “bad” you are with money. Alternately, it is a reflection of how well lenders and companies think you will repay your bills - based on information collected from studying other people.

2) It will let you see that if you want to better your credit score, you need to work on becoming the sort of debtor that studies have proved, tends to repay their bills. You do not have to work much to reinvent yourself financially and you do not have to start making much more money. You just need to be a trustworthy lender. This accomplishment alone should help make credit repair far less stressful!

Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients - such as credit card companies and utility companies, to name just two - who supply them with information.

Once a file has started on you (i.e. once you open a bank account or have bills to pay) then information about you is accumulated on the record. If you are late paying a bill, the clients call the credit bureaus and note this. Any unpaid bills, overdue bills or other problems with credit count as “dings” on your credit report and influence your score.

Information such as what category of debt you have, how much debt you have, how often you pay your bills on time, and your credit accounts are all information that is used to calculate your credit score.

Your age, sex, and income do not count towards your credit score. The realistic formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is accepted that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

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